NYT's Paul Krugman Sees Europe Through the Looking Glass

The New York Times once again gets it exactly backwards. Star op-ed columnist (and Princeton University professor) Paul Krugman tries to paint Europe as doing better than the U.S. economically, and he credits that to its big government ways. The facts are that Europe is not really doing all that great and that those countries that are doing better are generally the ones with recent cuts in government spending and with lower, flatter taxes.

In the New York Times of January 11, Paul Krugman calls Europe the "Comeback Continent". He contrasts the Europe of a few decades ago with that of today and with the US.

"It's true that Europe has had a lot of economic troubles over the past generation. In the mid-1970s the Continent entered a prolonged era of sluggish job creation, which contrasted with vigorous employment growth in the United States. And in the 1990s, Europe lagged behind America in the adoption of new technology. For example, in 1997 fewer than 15 percent of French homes contained personal computers and fewer than 1 percent were connected to the Internet.

"But that was then. Since 2000, employment has actually grown a bit faster in Europe than in the United States - and since Europe has a lower rate of population growth, this has translated into a substantial rise in the percentage of working-age Europeans with jobs, even as America's employment-population ratio has declined."

From 2000 to 2004 (the last years for which data are provided), the real GDP of OECD countries grew 8% and the US's grew 10%. Those years include the 9/11 attacks and a short recession in the US. So Krugman's premise appears flawed, as measured by real economic growth over those recent years.

However, some countries within the OECD did have growth exceeding 10% over those years. Can we spot any patterns?

The table below was computed from the US Statistical Abstract data. It lists the real economic growth, recent cuts in government spending, and the most recent level of government spending, all up to 2004. (International GDP trends since 2004 are not available in the most recent online US Statistical Abstract.)

Country

Real GDP Growth, 2000 to 2004

Government Spending Cuts, from 1987-2003 peak to 2004, as % of GDP

2004 Government Spending, as % of GDP

Ireland

23%

18.0%

34.0%

Slovakia

20

14.1

38.9

Greece

19

1.4

49.8

Hungary

17

13.6

48.7

Spain

13

9.9

38.7

Czech Republic

13

9.9

44.1

Iceland

12

1.0

45.6

Poland

12

8.5

42.5

Luxembourg

12

-0.9

43.1

UK

10

2.3

43.8

Finland

10

14.4

50.4

Sweden

9

15.8

56.7

Norway

8

10.3

45.9

France

7

1.1

53.3

Belgium

6

7.6

49.4

Austria

6

5.6

50.4

Denmark

4

5.9

54.7

Italy

4

8.5

47.8

Switzerland

3

0.4

36.3

Netherlands

3

12.1

46.3

Germany

3

2.0

47.3

Portugal

2

-0.8

46.7

OECD Total

8

2.2

40.7

U.S.

10

2.1

36.4

The country that cut its government spending the most, Ireland, had the fastest growth. In fact, Ireland cut its government spending to a level below that of the US. With the exception of the Netherlands, every country with below OECD-average growth had cut spending by less than 10% of GDP. On the other hand, of the seven countries that had cut spending by more than 10% of GDP, six had above average growth. Generally, those countries with lower government spending and deeper cuts in recent spending enjoyed the fastest growth.

Of course there were exceptions, but all "new Europe" countries on the list (Slovakia, Hungary, Czech Republic, Poland) enjoyed growth of 12% or more, and most "old Europe" countries, notably France and Germany, saw single-digit growth in that period.

Such trends should not be news to Mr. Krugman. In 2003, the Wall Street Journalnoted how Eastern Europe countries were adopting lower, flatter tax systems. "Unlike Old Europe, these recently liberated countries haven't had decades to build up interest groups that have a stake in high tax rates and can defeat any attempt at reform." As for the flat-taxers in particular, "in 2002, those economies grew an average of 6.1%, among the highest rates in Europe, old or new."

In fact, it is competition from new Europe and old Europe's tax cutters (e.g., Ireland), that caused the rest of old Europe to slim down government and therefore see more healthy economic growth in recent years.

As for the US, it is no longer the small government tiger it once was or Paul Krugman thinks still is. In 2006, government spending in the US was 36.5% of GDP, a higher percentage than that of Ireland, Slovakia and Switzerland. And the US has not cut spending all that much, recently. It cut about the same as the OECD total, and a smaller amount than 15 of the 22 European countries listed in the statistical abstract.

The lesson the US should learn from this is exactly the opposite the one Krugman tries to teach us. Instead of adopting old Europe's big government ways, the US should be cutting its government and lowering and flattening its taxes.

The New York Times once again gets it exactly backwards. Star op-ed columnist (and Princeton University professor) Paul Krugman tries to paint Europe as doing better than the U.S. economically, and he credits that to its big government ways. The facts are that Europe is not really doing all that great and that those countries that are doing better are generally the ones with recent cuts in government spending and with lower, flatter taxes.

In the New York Times of January 11, Paul Krugman calls Europe the "Comeback Continent". He contrasts the Europe of a few decades ago with that of today and with the US.

"It's true that Europe has had a lot of economic troubles over the past generation. In the mid-1970s the Continent entered a prolonged era of sluggish job creation, which contrasted with vigorous employment growth in the United States. And in the 1990s, Europe lagged behind America in the adoption of new technology. For example, in 1997 fewer than 15 percent of French homes contained personal computers and fewer than 1 percent were connected to the Internet.

"But that was then. Since 2000, employment has actually grown a bit faster in Europe than in the United States - and since Europe has a lower rate of population growth, this has translated into a substantial rise in the percentage of working-age Europeans with jobs, even as America's employment-population ratio has declined."

From 2000 to 2004 (the last years for which data are provided), the real GDP of OECD countries grew 8% and the US's grew 10%. Those years include the 9/11 attacks and a short recession in the US. So Krugman's premise appears flawed, as measured by real economic growth over those recent years.

However, some countries within the OECD did have growth exceeding 10% over those years. Can we spot any patterns?

The table below was computed from the US Statistical Abstract data. It lists the real economic growth, recent cuts in government spending, and the most recent level of government spending, all up to 2004. (International GDP trends since 2004 are not available in the most recent online US Statistical Abstract.)

Country

Real GDP Growth, 2000 to 2004

Government Spending Cuts, from 1987-2003 peak to 2004, as % of GDP

2004 Government Spending, as % of GDP

Ireland

23%

18.0%

34.0%

Slovakia

20

14.1

38.9

Greece

19

1.4

49.8

Hungary

17

13.6

48.7

Spain

13

9.9

38.7

Czech Republic

13

9.9

44.1

Iceland

12

1.0

45.6

Poland

12

8.5

42.5

Luxembourg

12

-0.9

43.1

UK

10

2.3

43.8

Finland

10

14.4

50.4

Sweden

9

15.8

56.7

Norway

8

10.3

45.9

France

7

1.1

53.3

Belgium

6

7.6

49.4

Austria

6

5.6

50.4

Denmark

4

5.9

54.7

Italy

4

8.5

47.8

Switzerland

3

0.4

36.3

Netherlands

3

12.1

46.3

Germany

3

2.0

47.3

Portugal

2

-0.8

46.7

OECD Total

8

2.2

40.7

U.S.

10

2.1

36.4

The country that cut its government spending the most, Ireland, had the fastest growth. In fact, Ireland cut its government spending to a level below that of the US. With the exception of the Netherlands, every country with below OECD-average growth had cut spending by less than 10% of GDP. On the other hand, of the seven countries that had cut spending by more than 10% of GDP, six had above average growth. Generally, those countries with lower government spending and deeper cuts in recent spending enjoyed the fastest growth.

Of course there were exceptions, but all "new Europe" countries on the list (Slovakia, Hungary, Czech Republic, Poland) enjoyed growth of 12% or more, and most "old Europe" countries, notably France and Germany, saw single-digit growth in that period.

Such trends should not be news to Mr. Krugman. In 2003, the Wall Street Journalnoted how Eastern Europe countries were adopting lower, flatter tax systems. "Unlike Old Europe, these recently liberated countries haven't had decades to build up interest groups that have a stake in high tax rates and can defeat any attempt at reform." As for the flat-taxers in particular, "in 2002, those economies grew an average of 6.1%, among the highest rates in Europe, old or new."

In fact, it is competition from new Europe and old Europe's tax cutters (e.g., Ireland), that caused the rest of old Europe to slim down government and therefore see more healthy economic growth in recent years.

As for the US, it is no longer the small government tiger it once was or Paul Krugman thinks still is. In 2006, government spending in the US was 36.5% of GDP, a higher percentage than that of Ireland, Slovakia and Switzerland. And the US has not cut spending all that much, recently. It cut about the same as the OECD total, and a smaller amount than 15 of the 22 European countries listed in the statistical abstract.

The lesson the US should learn from this is exactly the opposite the one Krugman tries to teach us. Instead of adopting old Europe's big government ways, the US should be cutting its government and lowering and flattening its taxes.